Five Years of Progress

Courtesy of Zero Hedge

Presented with no comment…



h/t @Not_Jim_Cramer

European Border Changes Over Last 1000 Years

Courtesy of Mish.

To help put the Russia-Ukraine battle over Crimea in proper perspective, here’s a long historical look at European borders.

Link if video does not play: European Border Changes over Last 1000 Years

Mike “Mish” Shedlock

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5 Things To Ponder: Serious Stuff


Courtesy of Lance Roberts of STA Wealth Management

There was so many good things to read this past week that it was hard to narrow it down to a topic group.  After a brief respite early this year, the markets are hitting new highs confirming the current bullish trend.  As a money manager, this requires me to increase equity exposure back to full target weightings.  After such an extended run in the markets, this seems somewhat counter-intuitive.  It is, but as Bill Clinton once famously stated; "What is….is." [I think Clinton said, “It depends on what the meaning of the word ‘is’ is.” The intitial part of the sentence being important and further distinguishing the meaning from the all too commonly spoken “It is what it is.” ~ Ilene]

However, while the current market "IS" within a bullish trend currently, it doesn't mean that this will always be the case. This is why, as investors, we must modify Clinton's line to: "What is…is…until it isn't." That thought is the foundation of this weekend's "Things To Ponder." In order to recognize when market dynamics have changed for the worse, we must be aware of the risks that are currently mounting.

1) Fisher Warns Fed's Bond Buying Could Be Distorting Markets via Reuters

While this article falls in the "no s***" category, Dallas Fed President Richard Fisher points out areas that we should be paying closer attention to for signs of change.

"There are increasing signs quantitative easing has overstayed its welcome: Market distortions and acting on bad incentives are becoming more pervasive," he said of the asset purchases, which are sometimes called QE.

"I fear that we are feeding imbalances similar to those that played a role in the run-up to the financial crisis."

Here are his main points:

1) QE was wasted over the last 5 years with the Government failing to use "easy money" to restructure debt, reform entitlements and regulations.

2) QE has driven investors to take risks that could destabilize financial markets.

3) Soaring margin debt is a problem.

4) Narrow spreads between corporate and Treasury debt are a concern.

5) Price-To-Projected Earnings, Price-To-Sales and Market Cap-To-GDP are all at "eye popping levels not seen since the dot-com boom."

"We must monitor these indicators very carefully so as to ensure that the ghost of 'irrational exuberance' does not haunt us again,"

In order to make it in professional sports, you have to be an elite athlete.  What is amazing, is that among all of the elite athletes, there are always one or two that rise above all others.  Players like Michael Jordon, Tiger Woods, Nolan Ryan and many others have elevated their game to inexplicable levels.  In the investment game, there are a few individuals that have done the same.  The follow three pieces are views from some of these men Howard Marks, Jeff Gundlach and Seth Klarman.

2) Howard Marks: In The End The Devil Usually Wins via Finanz Und Wirtschaft

"Our mantra at Oaktree Capital for the last few years has been: «move forward, but with caution». Although a lot has changed since then I think it’s still appropriate to keep the same mantra. Today, things are not cheap anymore.  Rather I would describe the price of most assets as being on the high side of fair. We’re not in the low of the crisis like five years ago."

"Let’s think about a pendulum: It swings from too rich to too cheap, but it never swings halfway and stops. And it never swings halfway and goes back to where it came from. As stocks do better, more people jump on board.  And every year that stocks do well wins a few more converts until eventually the last person jumps on board. And that’s the top of the upswing."

"But there actually are two risks in investing: One is to lose money and the other is to miss opportunity. You can eliminate either one, but you can’t eliminate both at the same time."

"There are two main things to watch: valuation and behavior."

3) Seth Klarman: Downplaying Risk Never Turns Out Well via Value Walk

"“In the face of mixed economic data and at a critical inflection point in Federal Reserve policy, the stock market, heading into 2014, resembles a Rorschach test,” he wrote. “What investors see in the inkblots says considerably more about them than it does about the market.”

"If you’re more focused on downside than upside, if you’re more interested in return of capital than return on capital, if you have any sense of market history, then there’s more than enough to be concerned about.”

“We can draw no legitimate conclusions about the Fed’s ability to end QE without severe consequences.”

“Fiscal stimulus, in the form of sizable deficits, has propped up the consumer, thereby inflating corporate revenues and earnings. But what is the right multiple to pay on juiced corporate earnings?”

“There is a growing gap between the financial markets and the real economy,”

“Our assessment is that the Fed’s continuing stimulus and suppression of volatility has triggered a resurgence of speculative froth.”

“In an ominous sign, a recent survey of U.S. investment newsletters by Investors Intelligence found the lowest proportion of bears since the ill-fated year of 1987,” he wrote. “A paucity of bears is one of the most reliable reverse indicators of market psychology. In the financial world, things are hunky dory; in the real world, not so much. Is the feel-good upward march of people’s 401(k)s, mutual fund balances, CNBC hype, and hedge fund bonuses eroding the objectivity of their assessments of the real world? We can say with some conviction that it almost always does. Frankly, wouldn’t it be easier if the Fed would just announce the proper level for the S&P, and spare us all the policy announcements and market gyrations?”

4) Jeff Gundlach & Howard Marks: Beware Of Junk Bonds via Pragmatic Capitalist

 "There’s been some cautionary commentary in recent months from some bond market heavyweights.  Most notably, Howards Marks and Jeff Gundlach. In a Bloomberg interview today, Marks said you need to be cautious about low quality issuers:

'When things are rollicking and the market is permitting low-quality issuers to issue debt, that’s when you need a lot of caution,'

And just a few weeks before that Jeff Gundlach referred to junk bonds as the most overvalued they’ve ever been relative to Treasury Bonds."

5) Bernanke Unleashed: What He Can Say Now That He Couldn't Say Before via Zero Hedge

Now that Ben Bernanke is no longer the head of the Fed, he can finally tell the truth about what caused the financial crash. At least that's what a packed auditorium of over 1000 people as part of the financial conference staged by National Bank of Abu Dhabi, the UAE's largest bank, was hoping for earlier today when they paid an exorbitant amount of money to hear the former chairman talk.

"The United States became 'overconfident', he said of the period before the September 2008 collapse of U.S. investment bank Lehman Brothers. That triggered a crash from which parts of the world, including the U.S. economy, have not fully recovered.

'This is going to sound very obvious but the first thing we learned is that the U.S. is not invulnerable to financial crises,' Bernanke said.

"He also said he found it hard to find the right way to communicate with investors when every word was closely scrutinised. 'That was actually very hard for me to get adjusted to that situation where your words have such effect. I came from the academic background and I was used to making hypothetical examples and … I learned I can't do that because the markets do not understand hypotheticals.'

The complexity though arises because in order to help the average person, you have to do things — very distasteful things — like try to prevent some large financial companies from collapsing.  The result was there are still many people after the crisis who still feel that it was unfair that some companies got helped and small banks and small business and average families didn’t get direct help.  It’s a hard perception to break.”

I guess the real question is now that the markets are once again over confident, over extended and excessively bullish – have we actually learned anything?

Have a great weekend.

To Understand the News, Follow the Money. To Follow the Money, Follow the Economic Hitmen.

To Understand the News, Follow the Money. To Follow the Money, Follow the Economic Hitmen.

"Plunderers of the world, when nothing remains on the lands to which they have laid waste by wanton thievery, they search out across the seas. The wealth of another region excites their greed; and if it is weak, their lust for power. Nothing from the rising to the setting of the sun is enough for them. 

Among all others only they are compelled to attack the poor as well as the rich. Robbery, rape, and slaughter they falsely call empire; and where they create a desolate wasteland, they call it peace."

Tacitus, Calgacus' Speech from Agricola

Remembering this may help one to understand some of the things that happen that otherwise may seem to make no sense.   In the pursuit of profit, their hypocrisy and disregard for justice and human life knows no bounds.

I will let you in on a little secret.  Not always, but the worst of them have a 'tell.'  You have to look at the long record of a person's action and mode of acting to assess this.  Are they plain and straightforward, or highly political and evasive in their motives.  Do they often say one thing, and yet do another.  If so, then this is their 'tell.'

The most cynical player will accuse and denounce their adversaries of the exact things that they have in mind, their precise motives, but first, and aggressively so with high indignation.  But their own actions will appear to be without principled cohesion, that is, principles but selectively applied.  Look for the inconsistencies, and if they are there, you know the type of hypocrite with whom you are dealing.

I think they do this because it defeats the ability of their opponent to accuse them of the very things that they themselves are doing.   I have seen this in company politics to geo-political squabbles, over and over.  Bald faced misdirection is almost standard fare these days of spin and propaganda in domestic politics.  

Telling the truth is considered to be naive, embarrassingly clumsy, an automatic disqualification from power. It is almost as bad as bending your knee to the power of God rather than the will to power, when we would all be gods.  Or caring for the poor and the disadvantaged, those disgusting, useless creatures.  Contemptible weakness!  Such are the times.

There is nothing quite so tempting as a poorly managed country with exploitable resources and assets like food, energy, and people.  And if it is well located for other geopolitical purposes, then so much the better.   Winning.


US Government Officials Said To Be Working On ‘Media-Leak’ Legislation To Impose Censorship

US Government Officials Said To Be Working On 'Media-Leak' Legislation To Impose Censorship

Courtesy of Jesse's Cafe Americain

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

In case you had not seen this, it is on the news wire from  United Press International.

It seems that if this legislation is real, and is enacted, and that is a big IF, then all a government bureaucrat will have to do is to refuse to permit disclosure on topics that it considers to be too important for even the media to know.  And they will be able to exercise a rather effective censorship over a compliant press.  

But I think we can be confident that the government of any political party, or any future President, can be trusted to never abuse this power to gag the Press to cover up their mistakes, scandals, or extra-constitutional activities. 

We will have to trust them.  Because we won't know if they are abusing that power because the information that they are will be .. classified.

Perhaps a secret independent court can be set up to review their decisions.  All of its decisions will be, of course, classified.

I wonder if the students at Georgetown understood the implications of what their privileged ears were hearing, or if they even cared.

I wonder how many other bloggers, who are so often preoccupied with freedom, will understand this and pick it up, or if they are just afraid, or even care.

No wonder. Audacious oligarchy, indeed.

NSA chief hints at 'media-leak' legislation
By Aileen Graef
March. 5, 2014 

Journalists and press freedom have taken a hit from the government since Edward Snowden leaked NSA documents to the Guardian, Washington Post, and New York Times.

WASHINGTON, March 5 (UPI) — National Security Agency chief Gen. Keith Alexander was speaking at Georgetown University when he hinted that government officials were working on "media-leak legislation" that would presumably restrict the press from publishing any documents regarding national security that the government doesn't approve for disclosure.

The NSA director said that the U.K. was right in detaining David Miranda, partner of journalist Glenn Greenwald who first published the Snowden files at the Guardian, on terrorism charges and seizing all of his files. Alexander said the actions were justified in the interests of national security.  [Keep reading >]


What The Hell Is That Ticking Sound In My Head! Household Wealth – The Real Story


Courtesy of Lee Adler of the Wall Street Examiner

Yesterday the media got all bulled up over the Fed’s new data on household wealth showing that it hit a record in the fourth quarter of 2013. As usual with Wall Street’s chattering media class, this wasn’t quite the whole story, at least not the “real” story. 

The total net worth of households and non profits did reach a record in nominal terms. But that’s not the same thing as the wealth of individual households hitting a record in real, inflation-adjusted terms. In addition, the calculation of the numbers is based on absurd assumptions which everyone takes for granted as being realistic. And if the net worth of the top 1% was lopped off, the picture would be far bleaker.

But we need not even go there. By now it’s been well established that those in the upper income strata have gotten virtually all of the gains in wealth in recent years while the majority falls deeper into the economic mire.

For this analysis I look at the data as a whole and do the simple exercises of dividing the total net worth of households and non-profits of $80.66 trillion by the census bureau’s estimate of the total year end population of the US of 317.44 million. Then I converted that to real terms by dividing the result by the Consumer Price Index. That’s conservative enough. It probably understates inflation by underweighting housing and doesn’t take into account asset inflation at all. But it’s a widely accepted means of converting nominal measures into real, inflation adjusted numbers. The same operation is then performed for every quarter going back in time as far as the data goes. The results are then plotted on this graph. It shows how the wealth of households has trended in real terms per capita.


Real Household Net Worth Per Capita - Click to enlarge


I’ve also plotted alongside that line a graph of the Fed’s holdings in its System Open Market Account, which is all of the Fed’s paper holdings that it acquires in trades with Primary Dealers. Prior to 2007, the Fed had steadily grown its holdings at the rate of about 4-5% per year. Household wealth grew at almost double that rate beginning in 1994, prompting Alan Greenspan to proclaim “irrational exuberance” in 1996. Greenspan was particularly concerned that the prices of stocks were growing faster than the Fed’s balance sheet. That was something new. Historically they had grown at more or less the same rate.

The collapse of the internet/tech bubble in 2000-2003 took some of the bloom off the rose as household wealth fell back to the long term trend. Panicked, the Fed sharply lowered interest rates while keeping its asset growth in the 4-5% range. That was sufficient to trigger Housing Bubble I which led to record levels of household wealth per capita in real terms beginning in 2004. That tide peaked in 2006, when the housing bubble crested.

As the Fed scrambled in the early stages of the credit crisis, it kept rates low, but withdrew cash from the Primary Dealer system and shrunk its SOMA to fund emergency lending programs in 2007 and most of 2008. The housing bubble crashed and stocks had a big bear market. Household wealth in real terms went back to trend. That’s where, like Greenspan before him, Bernanke hit the panic button, opening the floodgates on a massive surge of Fed credit into the financial markets via the Primary Dealers. That initially was followed by a slow recovery in household net worth as the stock market turned sharply and housing prices bottomed in 2009-2011. By late in 2012, both markets were trending sharply higher.

The Fed had a brief return of sanity as it paused QE through most of 2011 and 2012. The housing and stock market recoveries were actually picking up steam during that period. But that was only a temporary remission of the craziness.

Late in 2012 the Fed’s went completely mad. In spite of the fact that both house prices and stocks were in raging bull markets by that point, it opened the money printing floodgates again. This caused extreme distortions in the housing market where prices rose to bubble levels while sales activity remained near record lows. The majority of households were and are in no position to be able to afford buying a house, but prices skyrocketed because there was no supply and absurdly low mortgage rates were subsidizing buyers and inflating prices. It also caused the bubble conditions in stock prices today.  

The funny thing is that even though few houses are on the market, and even fewer are sold, the Fed and everybody else thinks that we can simply extrapolate the value of all housing based on this tiny sample of sale prices. The media and Wall Street, and the economic establishment all buy in to this charade.

Has anyone considered what would happen to prices if a few more people had to sell their houses in the face of the current near record low buyer demand? These prices are fictitious in that regard. By extrapolating those few sale prices to the entire US housing inventory, the Fed creates the illusion of massive amounts of wealth, backed by massive amounts of mortgage debt. This is the essence of the fictitious capital nightmare we face. And nobody is paying attention because of the way we think about this data. It’s irrational, but everybody looks at it the same way, like they did a decade ago.

Don’t think that another collapse can’t happen because it can. We’re making all the same mistakes, only worse because we should know better.

Despite what the headlines say, there’s no new high in net worth per capita, and by extension per household, in spite of all the central bank money creation that we’ve seen over the past 5 years. Net worth per capita was still below the 2006 peak level in real terms in the fourth quarter. No doubt that when the first quarter data is in it will be at a record, most likely by a substantial margin given what has already transpired this year. But the questions we must ask are who benefitted, and is it real?

If most people don’t own stocks, or houses in areas that have seen strong appreciation, and if house prices would fall in the presence of an increase in homes for sale to historic norms, then this new high in net worth is an illusion. Increasing wealth at top of the household wealth strata cannot carry economy to growth indefinitely. “Wealth” based on a tiny sample of inflated sales prices at record low financing costs cannot be liquidated. If the majority do not experience economic gains and cannot provide a strong and broad base of real demand, then the growth of asset prices will eventually slam back to trend, and probably worse.

We have seen that three prior surges in household net worth driven by cheap and easy central bank credit have crashed back to earth after about 5 years of extreme bubble gains. The current surge is in its fifth year. What’s that ticking sound I hear?  

Get regular updates on the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE’s Professional Edition risk free for 30 days!

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. 

Can The United States Rule The (Energy) World?

Courtesy of Daniel J. Graeber of,

Geopolitical crises in Eastern Europe have been met with calls in the United States to use energy as a foreign policy tool. With U.S. Energy Secretary Ernest Moniz asking the industry to make a stronger case, however, it's domestic policies that may inhibit energy hegemony.

"The industry could do a lot better job talking about the drivers for, and what the implications would be, of exports," Moniz told an audience at the IHS CERAWeek energy conference in Houston.

The Energy Information Administration said in its weekly report that gross exports of petroleum products from the Unites States reached 4.3 million barrels per day in December, the first time such exports topped the 4 million bpd mark in a single month.

EIA said the United States is a net exporter of most petroleum products, but crude oil exports are restricted by legislation enacted in response to the Arab oil embargo in the 1970s.

In January, Kyle Isakower, vice president of economic policy at the American Petroleum Institute, said reversing the ban would help stimulate the U.S. economy and lead to an increase in domestic oil production by as much as 500,000 bpd. Current export polices, he said, are "obsolete."

This week in Houston, Sen. Lisa Murkowski, R-Alaska, ranking member of the Senate Energy Committee, said oil could help reposition the United States as the premier superpower.

"Lifting the oil export ban will send a powerful message that America has the resources and the resolve to be the preeminent power in the world," she said.

President Obama can show "true American grit" if he acts quickly and according to precedent. If the ban is reversed, it will be for the benefit of the international community, she said.

Moniz, who said in December the export ban deserves some "examination," said he wasn't yet convinced the case had been made to open the U.S. spigot, however.

For natural gas, House Energy and Commerce Committee Fred Upton, R-Mich., said expanding U.S. liquefied natural gas exports could be used to contain Russia, which dominates much of the Eastern European gas market.

Russia caused a stir with its military response to the Ukrainian situation and Upton said Monday foot-dragging at the Energy Department on LNG exports was putting U.S. allies in Eastern Europe "at the mercy of Vladimir Putin."

The U.S. federal government needs to determine that LNG exports to countries without a free-trade agreement are in the public's interest. The United States doesn't have a free trade agreement with any European country and the current transatlantic agreement up for debate has been stymied by EU concerns over the National Security Administration's cyberespionage campaign.

A January report from the Center for a New American Security said the economic connection that would come from oil exports could manifest itself as "coercive political influence" in foreign affairs. Domestic policy, however, needs to be honed first before the U.S. tries once again to tip the balance of power overseas.

Benefit From the Latest Energy Trends and Investment Opportunities before the mainstream media and investing public are aware they even exist. The Free Energy Intelligence Report gives you this and much more. Click here to find out more.

World Justice Project: 2014 Rule of Law Report Recommended

Courtesy of Larry Doyle.

Among various reports that I look for on an annual basis, I appreciate the Rule of Law Index produced by the World Justice Project as much as any.

Why do I anticipate reading and reviewing this report so much? Because  we are a nation of laws and not of men. At least I think we are . . . although sometimes I wonder. As the WJP highlights,

“Effective rule of law helps reduce corruption, alleviate poverty, improve public health and education, and protect people from injustices and dangers large and small,” said William H. Neukom, WJP Founder and CEO. “Wherever we come from, the rule of law can always be strengthened.”

The Index is the most comprehensive index of its kind and the only to rely solely on primary data.

The more serious students in the audience may care to review the entire report. For those who might care for an abbreviated version of how the United States is doing, I welcome informing you of the following:

Our overall rank across all factors measured: 19th out of 99 nations. But let’s dig a little deeper and be a little more rigorous in our review. On a regional basis the USA is little better than average and relative to those nations with similar income levels, we consistently rank near the lower third if not worse than that by most measures.

A great nation? True leaders and statesmen know that a nation needs to uphold and embrace the rule of law, protect property rights, and expose corruption wherever it thrives in order to be a nation worthy of being called ‘great.’

We have a lot of work to do.

Additionally, the following line jumps out of the report on page 46:

“The United States saw a significant decline during the past year in people’s trust in the system of checks and balances and the protection of the right to privacy.”

Trust is the cornerstone of our markets, our economy, and ultimately our nation.

Is it any real surprise given all that we have witnessed not only over the last year but preceding years as well why people are less trustworthy about our system of checks and balances in America. Think of the massive abuses of power — with little meaningful accountability and truth — that have weighed upon our nation.

In thinking of all that we have experienced since the crisis that was centered on Wall Street and ran across our nation and the global economy, I think we should reflect on the concluding remark from this piece entitled, Perspectives on the Constitution,

. . . democratic republics are not merely founded upon the consent of the people, they are also absolutely dependent upon the active and informed involvement of the people for their continued good health.

Navigate accordingly.

Never Turn Down a Free Gift

By Paul Price of Market Shadows

We Cashed in on the Big Gift From Big Lots Today

Market Shadows doesn’t mind taking favors from overreactions. Close-out retailer Big Lots (BIG) jumped dramatically on the opening and just beyond, after reporting fourth quarter results that beat estimates on an adjusted basis.

We sold our 100 share position for a very nice price of $35.91 locking in a 26.2% gain. We think other retail names are more attractive after today’s price surge in BIG.

 BIG quote

The $3,591 will now go into our cash reserves bringing the total to about $7,321.

 BIG 5-day chart

Follow all our closed-out and current equity positions at Market Shadows' Virtual Value Portfolio.  

How Watching Market Psychology Can Help You Time the Market

How Watching Market Psychology Can Help You Time the Market 

Elliott wave patterns in price charts reflect the struggle between the bulls and bears. Watch Elliott Wave's video illustrating this point here.

Text version below.

Two economic reports hit the newswires Thursday morning (March 6). Both were important, yet each one had the opposite implication for the trend.

The market chose one report over the other, and the question is, why — and what can we learn from that?

Both reports came out at the same time, 8:30 Eastern on Thursday morning. One was from Europe, where the European Central Bank said that they, "…decided to keep the key ECB interest rates unchanged." That suggested that the European economy was getting stronger.
The second report was from the United States, where "…the weekly applications for jobless benefits fell to a three month low." That also was a sign of economic improvement.

Immediately after, the euro jumped to a new high for the year against the U.S. dollar. But why did the euro gain, and not the dollar? After all, the news from the US was also positive?

The answer comes down to understanding market psychology. All things being equal, it's the bias of the traders that determines the market's fate. The question is, how do you know what traders are thinking?

That's where Elliott wave analysis comes in. Wave patterns in price charts reflect the struggle between the bulls and the bears. So by tracking wave patterns, you can anticipate which side will ultimately win.

Let's take a look at what the waves were saying before the surge in the euro on Thursday. The day before, our Currency Pro Service told subscribers that the euro was forming a wave pattern called a triangle.

A triangle is pattern that moves against the primary trend, so when it ends, the old trend resumes — in this case, up. On Wednesday, that allowed us to make a very clear forecast for the euro-dollar:

[Posted On:] March 05, 2014 03:27 PM

From nearby levels further consolidation through waves D and E [of the unfolding triangle] should set the stage for a thrust above 1.3824.

On Thursday morning, not only did the euro hit its Elliott wave target, it actually went as high as 50 points above it.

The lesson here is obvious. In the world of finance, where every day you have multiple news reports competing for your attention, focusing on market psychology goes a long way.


Learn how to apply Elliott wave analysis to your markets. Elliott Wave International's Senior Currency Strategist Jim Martens pulls from 25+ years of experience using Elliott wave analysis to show how you can put the power of the Wave Principle to work in your forex trading. Download your free 14-page eBook now >>


This article was syndicated by Elliott Wave International and was originally published under the headline How Watching Market Psychology Can Help You Time the Market. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

How Watching Market Psychology Can Help You Time the Market

Elliott wave patterns in price charts reflect the struggle between the bulls and bears as shown in Elliott Wave International’s video. (Text version below.)

Two economic reports hit the newswires Thursday morning (March 6). Both were important, yet each one had the opposite implication for the trend.

The market chose one report over the other, and the question is, why — and what can we learn from that?

Both reports came out at the same time, 8:30 Eastern on Thursday morning. One was from Europe, where the European Central Bank said that they, “…decided to keep the key ECB interest rates unchanged.” That suggested that the European economy was getting stronger.
The second report was from the United States, where “…the weekly applications for jobless benefits fell to a three month low.” That also was a sign of economic improvement.

Immediately after, the euro jumped to a new high for the year against the U.S. dollar. But why did the euro gain, and not the dollar? After all, the news from the US was also positive?

The answer comes down to understanding market psychology. All things being equal, it’s the bias of the traders that determines the market’s fate. The question is, how do you know what traders are thinking?

That’s where Elliott wave analysis comes in. Wave patterns in price charts reflect the struggle between the bulls and the bears. So by tracking wave patterns, you can anticipate which side will ultimately win.

Let’s take a look at what the waves were saying before the surge in the euro on Thursday. The day before, our Currency Pro Service told subscribers that the euro was forming a wave pattern called a triangle.

A triangle is pattern that moves against the primary trend, so when it ends, the old trend resumes — in this case, up. On Wednesday, that allowed us to make a very clear forecast for the euro-dollar:

[Posted On:] March 05, 2014 03:27 PM

From nearby levels further consolidation through waves D and E [of the unfolding triangle] should set the stage for a thrust above 1.3824.

On Thursday morning, not only did the euro hit its Elliott wave target, it actually went as high as 50 points above it.

The lesson here is obvious. In the world of finance, where every day you have multiple news reports competing for your attention, focusing on market psychology goes a long way.

Learn how to apply Elliott wave analysis to your markets. Elliott Wave International’s Senior Currency Strategist Jim Martens pulls from 25+ years of experience using Elliott wave analysis to show how you can put the power of the Wave Principle to work in your forex trading.

Download your free 14-page eBook now >>

This article was syndicated by Elliott Wave International and was originally published under the headline How Watching Market Psychology Can Help You Time the Market. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

China Sides With Russia On Sanctions; Ambassador Warns “Western Nations Would Be Hurting Themselves”

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Amid a Russian spokesperson "hoping" tensions do not escalate into a new cold war with the US, China has come out (perhaps unsurprisingly) on Russia's side strongly condemning any sanctions:

"China has consistently opposed the easy use of sanctions in international relations, or using sanctions as a threat.”

The comments from China's Foreign Ministry reflect the country's close ties with Russia and confirm what Russia's ambassador to Canada noted, we "can always turn to China if the West follows through on threats of tougher sanctions," adding that "Western countries would largely be hurting themselves if they impose tougher sanctions."



Some cryptic words this morning:


Furthermore, as The Globe and Mail reports, it is clear the Russians have a plan…

Russia’s ambassador to Canada says he was surprised no one bothered to speak with him about the crisis in Ukraine before he received a diplomatic dressing-down last Saturday, and added his country can always turn to China if the West follows through on threats of tougher sanctions.

In a wide-ranging interview with The Globe and Mail, Georgiy Mamedov insisted Russia wants to see the crisis in Ukraine resolved peacefully.

And he said Western countries would largely be hurting themselves if they impose tougher sanctions or make good on warnings that they could boot Russia out of the G8.

US Guided-Missile Destroyer Truxton Has Entered The Black Sea

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

As we reported yesterday, after getting permission to cross the Bosphorus, the guided-missile destroyer USS Truxton departed the Greek port of Souda Bay on its way to the Black Sea. As of a few hours ago, it is already there. Sky News reports that the USS Truxtun passed the Dardanelles strait earlier today on its way to the Black Sea amid heightened tension over the crisis in Ukraine and reports that Russia has now 30,000 troops in Crimea.

The naval escalation is not the only arms build up in proximity to the Ukraine: the Pentagon said six US F-15 fighter jets have arrived in Lithuania to bolster air patrols over the Baltics. The fighter jets and 60 US military personnel landed at Siauliai Air Base in Lithuania, adding to the four F-15s and 150 troops already there to do the air patrol mission.

As for the pretext for the Truxton's move, it is only 300 miles away from Sevastopol for one simple reason: naval exercises.

Joint naval exercises with Bulgarian, Romanian and US vessels are to take place in the Black Sea on March 11.

The naval forces of all three nations have stated no connection between the upcoming drill and the tensions on Ukraine's Crimean Peninsula, where the Russian Black Sea Fleet is based, the Bulgarian National Radio has reported.

Vessels participating in the event include a Bulgarian frigate, three Romanian ships and US destroyer USS Truxtun. The US military described the joint military maneuvers as a "routine" deployment scheduled last year, long before the standoff in Ukraine.

Crimea, however, is some 500 km to the north-east of the location where the drill is to be carried out.

According to a statement by the US Navy, the Truxtun left Greece on Thursday after it was granted passage through the Black Sea Straits by Turkey, which controls their traffic.

The USS Truxtun will be at the Bulgarian city of Varna's port from March 12 to March 14

And the Russian ICBM launch was just part of a "routine" drill too.


Bill Gross Responds: “Sick Of [El-Erian] Undermining” Him


Bill Gross Responds: "Sick Of [El-Erian] Undermining" Him

Courtesy of ZeroHedge

Following last week's discovery that Mohamed El-Erian was "sick of cleaning up [Bill Gross’s] shit" as tensions soared at PIMCO, the "bond king" has struck back blasting to Reuters that he's "so sick of Mohamed trying to undermine me," claiming El-Erian wrote the damaging WSJ article.

Furthermore, the somewhat paranoid-sounding Gross indicated that he had been monitoring El-Erian's phone calls but when questioned by Reuters for evidence of El-Erian's undermining, Gross responded "you're on his side. Great, he's got you, too, wrapped around his charming right finger." As one analyst noted, "I've never seen Bill and Pimco scrutinized like this before… a couple of high-profile stumbles and mediocre showings, coupled with some outflows clearly has some investors on edge."

Via Reuters,

Gross told Reuters that he had "evidence" that El-Erian "wrote" a February 24 article in the Journal, which described the worsening relationship between the two men as Pimco's performance deteriorated last year, including a showdown in which they squared off against each other in front of more than a dozen colleagues at the firm's Newport Beach, California headquarters.

Gross, who oversaw more than $1.91 trillion in assets as of the end of last year and who is known on Wall Street as the 'Bond King', said in a phone call to Reuters last Friday: "I'm so sick of Mohamed trying to undermine me."

When asked if Reuters could see the evidence about El-Erian and the allegation he was involved in the article, Gross said: "You're on his side. Great, he's got you, too, wrapped around his charming right finger."

He said he knew that El-Erian, who had been widely seen as the heir apparent to Gross but is now due to leave in mid-March, had been in contact with Reuters as well as the Wall Street Journal.

Gross indicated he had been monitoring El-Erian's phone calls.

The Wall Street Journal quickly denied Gross' claims…

When asked about Gross's claim that El-Erian "wrote" the article, a spokeswoman for Dow Jones, the publisher of The Wall Street Journal, said: "This is an astoundingly incorrect claim about a thoroughly reported article that was in the best tradition of The Wall Street Journal."

As we noted previously, isn't it interesting that all these tensions occur as the Fed starts to taper and bonds, according to many strategists, end a 30 year bull market…

The latest signs of a rift between Gross and El-Erian, who once praised each other fulsomely, come as Gross is grappling with clients who are also turning their backs on the very asset class that has made him famous.

That is happening partly because the Federal Reserve continues to reduce its controversial bond buying that has provided stimulus to the U.S. and world economies.

Pimco saw its assets under management shrink by $80 billion in 2013 due to outflows and negative returns, according to Morningstar.

"I've never seen Bill and Pimco scrutinized like this before. This is the most attention I have seen on them," said Eric Jacobson, Morningstar senior analyst who has covered Pimco for nearly two decades. "A couple of high-profile stumbles and mediocre showings, coupled with some outflows – and with no identified successor for life after Bill – clearly has some investors on edge."


Debt Rattle Mar 7 2014: The US Economy’s Volatile Inertia

Courtesy of The Automatic Earth.

Jack Delano Milk Woman Taking Over In Wartime, Bryn Mawr, Pa. June 1943

175,000 new jobs (we await revisions) and a rising unemployment rate (6.7%). Which was not due to people re-entering the labor force, as has been suggested, since the labor force participation rate remained stuck at 63%. This hasn’t been going anywhere for years now, it’s all stuck around 150,000 or so – the running to stand still level – , sometimes up, sometimes down, with lots of revisions. It should worry the pants off of America, but stock markets set new records on a regular basis instead.

Since the real economy is hardly budging at all, the “new profits” can only come from QE-esque money streams, and that, after 5 years now, is getting extremely worrisome. Janet Yellen may keep it up a while longer, but there’s so much inert volatility (aka volatile inertia) built in to the US economy by now that is has become inevitable that an infinitely small spark can set the whole thing on fire, let alone an escalating conflict like Crimea.

The US economy has no resilience left, it’s a severely overworked one trick pony that can’t, as should be organic and obvious, make up for losses in one field with gains in another, since all gains have come from one and the same source for years now. It’s an accident waiting to happen, and it has no defenses left against any such accident: they’ve been spent on various QEs, and used as a defense against truth finding, not crisis. How bad things are is illustrated in this graph I picked up at Zero Hedge:

Personal savings (yoy), personal income (yoy), GDP (yoy), everything is on a downward trend as, moreover, household debt levels have risen fast. Where on earth would GDP and incomes be without that debt? If you’re even a teeny weeny little faint of heart, you might not want to give that too much thought. And besides, there’s no shortage of good news, right? Like this from Bloomberg:

US Household Worth Climbs by $2.95 Trillion to Record $80.7 trillion

Net worth for households and non-profit groups rose by $2.95 trillion in the fourth quarter, or 3.8% from the previous three months, to a record $80.7 trillion,

• The value of financial assets, including stocks and pension fund holdings, held by American households increased by $2.52 trillion in the fourth quarter, according to today’s Fed report. The Standard & Poor’s 500 Index climbed 9.9% from Sept. 30 to Dec. 31, capping the best yearly gain since 1997.

• Household net worth was $11.8 trillion greater than its pre-recession peak of $68.8 trillion reached in the second quarter of 2007.

Does that look good or what? Well, it does, if you don’t read the last few paragraphs:

Household debt increased at a 0.4% annualized rate last quarter, today’s Fed report showed. Mortgage borrowing dropped at a 1% pace. Other forms of consumer credit, including auto and student loans, increased at a 5.4% pace.

For all of 2013, household debt climbed 0.9%, the biggest gain since 2007, even as Americans continued to pay down home loans. Mortgage borrowing fell 0.8%, the smallest drop since 2008, which marked the first year of the recession.

• Total non-financial debt increased at a 5.4% annual pace last quarter, the most in a year. Federal government obligations jumped by 11.6%, the biggest gain since the first three months of 2012.

Household worth rises at the same time that household debt does. Yes, sure. Federal debt up 11.6%, and the Fed still adds $65 billion a month.

We’re basking in the blinding light of a mirage that’s set to blow. One spark is all it will take. There are no firefighters left, and no water to extinguish the flames.

What could create that spark? Ukraine, obviously, people will panic the moment the first shot is fired. It’s not as if the US exudes confidence in the matter, but that is of minor importance, stocks would drown regardless.

Another possibility would be the housing market, and in general a continuation of rising interest rates in the real economy. As Michael Lombardi explains:

Why the U.S. Housing Market Recovery Will Falter This Year

• … from their peak in 2007 to their low in late 2011, U.S. home prices fell by about 30%. Since then, prices in the housing market have improved, but they are still down about 20% compared to 2007. Basically, home prices have recouped only one-third of their losses from the 2007 real estate crash.

• … the interest rate on the 30-year fixed mortgage tracked by Freddie Mac increased to 4.43% in January of this year from 3.41% in January of 2013.

• … mortgage rates have increased by 30% in one year’s time. With the Federal Reserve cutting back on its quantitative easing program, interest rates are expected to continue their path upwards in 2014.

• … The U.S. Mortgage Bankers Association reported last week that its index, which tracks mortgage activity (of both refinanced and new home purchases), fell 8.5% in the week ended February 21.

• … If there is one thing the housing market detests, it’s rising interest rates. Higher interest rates simply push would-be homebuyers away. And with rates expected to continue rising in 2014, I see the housing market rebound stagnating this year.

One spark to a defenseless system with far too few moving parts left and overflowing with volatility. The US economy is a sitting duck dead in the water.

Nonfarm Payrolls +175,000, Household Survey +42,000; Unemployment Rate 6.7%

Courtesy of Mish.

Initial Reaction

Nonfarm Payrolls rose by 175,000 vs. a Bloomberg consensus expectation of 150,000.

The employment change for December 2013 was revised up by 9,000 (from +75,000 to +84,000), and the employment change for January 2014 was revised up by 16,000 (from +113,000 to +129,000). The overall effect was a modest two-month upward revision of +25,000.

Beneath the surface, things look worse again. The household survey shows a gain of employment of only 42,000 while unemployment rose by 223,000.

February BLS Jobs Statistics at a Glance

  • Nonfarm Payroll: +175,000 – Establishment Survey
  • Employment: +42,000 – Household Survey
  • Unemployment: +223,000 – Household Survey
  • Involuntary Part-Time Work: -71,000 – Household Survey
  • Voluntary Part-Time Work: -138,000 – Household Survey
  • Baseline Unemployment Rate: +0.1 to 6.7% – Household Survey
  • U-6 unemployment: -0.1 to 12.6% – Household Survey
  • Civilian Non-institutional Population: +170,000
  • Civilian Labor Force: +264,000 – Household Survey
  • Not in Labor Force: -94,000 – Household Survey
  • Participation Rate: +0.0 at 63.0 – Household Survey

Additional Notes About the Unemployment Rate

  • The unemployment rate varies in accordance with the Household Survey, not the reported headline jobs number, and not in accordance with the weekly claims data.
  • In the past year the population rose by 2,257,000.
  • In the last year the labor force fell by 213,000.
  • In the last year, those “not” in the labor force rose by 2,253,000
  • Over the course of the last year, the number of people employed rose by 2,044,000 (an average of 170,333 a month)

The population rose by over 2 million, but the labor force fell by over 200,000. People dropping out of the work force accounts for much of the declining unemployment rate.

February 2014 Employment Report

Please consider the Bureau of Labor Statistics (BLS) February 2014 Employment Report.

Total nonfarm payroll employment increased by 175,000 in February, and the unemployment rate was little changed at 6.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in professional and business services and in wholesale trade but declined in information.

Continue Here

Record Jobs For Old Workers; Everyone Else – Better Luck Next Month

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

We have long been pounding the table (certainly since mid-2012) that the US labor market has become a place where mostly older workers – those 55 and over – are hirable – something which has nothing to do with demographics, and everything to do with excess worker slack, and an employer's market to pick and chose those workers that are most qualified for a job since older workers have the same wage leverage as younger ones: none. February was merely the latest confirmation of just this.

The chart below shows the age breakdown of the various age groups of workers hired in the past month. The vast majority, or 239K of the job gains(according to the Household survey), once again fell into the oldest group, those aged 55-69. The core demographic, those 25-54, rose by a negligible 29K. Everyone else, i.e., those 16-24, saw a total of 153K in job losses.


The good news (for them, and bad news for everyone else): the number of workers aged 55 and over just hit a fresh all time record high:


And finally, here is the full breakdown of "young vs old" jobs since the start of the Depression in December 2007: those 55 and older have gained 4.9 million jobs. Those under 55 are still some 3.1 million jobs below their December 2007 level.

Is That Broker Soliciting You an Ex-Con?

Courtesy of Larry Doyle.

Not that we needed any more evidence that Wall Street’s primary self-regulator is a challenged organization when it comes to protecting investors, but in a lead commentary in today’s Wall Street Journal we get it:

The Financial Industry Regulatory Authority “routinely” strips out some possible red flags on brokers from its database in the information it makes available to investors, according to a study released Thursday by an organization of lawyers who represent investors in claims against brokers. 

The study followed a Wall Street Journal investigation, which disclosed in a page-one article Thursday that more than 1,600 brokers’ records don’t show personal bankruptcies and criminal charges that should be reported.

Criminal charges, huh? Such as . . .

The criminal charges uncovered by the Journal, which don’t show up on brokers’ records—in accordance with the current rules—include assault, sexual contact without consent, hit-and-run and habitual substance abuse.

Would you want to know if an individual soliciting you has a rap sheet with charges such as those? I would.

FINRA would maintain how could they possibly keep up with the hundreds of thousands of brokers populating our nation, and that fairness dictates some material be expunged. I am all for rehabilitation, but I am also a big proponent of protecting investors –many of whom are senior citizens viewed as easy prey by unscrupulous brokers.

Investors can look up brokers on a Finra website called “BrokerCheck” and quickly find out their professional history. But the Public Investors Arbitration Bar Association, the lawyer group, said Thursday that Finra was scrubbing potential black marks from the information it provided to investors.

Scrubbing black marks? How do you spell complicit? How about aiding and abetting?

Finra defended its BrokerCheck tool. “While the system may not be perfect, we do have to make determinations on what information…is appropriate to release, while at the same time balancing fairness,” it said.

Fairness? Please. Tell that to the countless number of truly decent individuals in our nation who our government and financial regulators have massively failed to properly protect.

How is it that ex-cons are in a position to solicit often uninformed and largely unprotected investors? I will tell you how. Because the meter maids running FINRA do not hold the banks and brokers who hire ex-cons to proper account when a whole host of bad practices occur. When penalties do not fit the crime, then the message sent to the industry is ‘keep doing what you’re doing.’

While we fully check and disclose the backgrounds of the ex-cons, how about we also mandate that the execs running FINRA release all the data and records regarding a whole host of other questionable practices (kangaroo courts, misappropriation of funds, allegations of lying, and so much more) surrounding FINRA itself.

For those unaware, FINRA is not subject to the Freedom of Information Act — although it should be — and utilizes the defense of an absolute immunity privilege when challenged in court. Absolute immunity without total transparency is nothing more than a license to steal.

This edition of “You Can Not Make This Stuff Up” is merely further evidence that this self-regulator is indeed ‘In Bed with Wall Street.’

Navigate accordingly.

Gazprom Warns Of “Repetition Of 2009 Gas Situation” In Ukraine

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

We have discussed the sword of Damocles that is hanging over the heads of the Ukrainian (and European for that matter) people for some time. The dominant role that Russia plays in providing energy is becoming critical, however, as Gazprom notes:

  • *GAZPROM: UKRAINE DEBTS CREATE 'RISK OF RETURN TO SITUATION AT BEGINNING OF 2009' (when Gazprom cut off Ukraine gas supplies)

Of course, the US agreed to $1b bailout yesterday – but that's not supposed to be used as a direct transfer payment to the Russians

Via Interfax,

The debt that Ukraine's Naftogaz Ukrainy owes for Russian natural gas has risen to $1.89 billion, Gazprom CEO Alexei Miller told journalists.

"In fact, this means that Ukraine has stopped paying for gas," Miller said.

"This is completely at odds with the provisions of the contract and international trade practice. For our part, we have always met and will meet our contractual obligations. But we can't supply gas free of charge. Either Ukraine repays its debt and pays for current deliveries or the risk of returning to the situation at the beginning of 2009 will appear. We will notify the Russian government concerning the situation that is taking shape," Miller said.

"Today, March 7, was the payment deadline for February's deliveries of gas to Ukraine. Gazprom has not received payment on the debt. Including the price discount in effect in the first quarter, the overdue debt for gas has increased significantly and now totals $1.890 billion," he said.

It would appear this is the most important map in Europe once again…


and what happened in 2009…

Gazprom demanded a price hike to $400-plus from $250, Kiev flatly refused, and on New Year's day 2009, Gazprom began pumping only enough gas to meet the needs of its customers beyond Ukraine.

Again, the consequences were marked. Inevitably, Russia accused Ukraine of siphoning off supplies meant for European customers to meet its own needs, and cut supplies completely. As sub-zero temperatures gripped the continent, several countries – particularly in south-eastern Europe, almost completely dependent on supplies from Ukraine – simply ran out of gas. Some closed schools and public buildings; Bulgaria shut down production in its main industrial plants; Slovakia declared a state of emergency. North-western Europe, which had built up stores of gas since 2006, was less affected – but wholesale gas prices soared, a shock that was declared "utterly unacceptable" by Brussels.

Forget those sanctions…

The market is not happy – Ukraine is not fixed as June 2014 bond yields soar to 47%!!


and German stocks are tanking…


The acting Premier is in panic mode:


We suspect, as the bond market makes clear, that any IMF money will go direct to Gazprom and not to debt repayment.


T. Hoenig: ‘TBTF’ Banks Insufficient Equity Capital; The Case for Glass-Steagall

Courtesy of Larry Doyle.

I inadvertently overlooked a recent commentary written by a Sense on Cents favorite, Simon Johnson, that ran at Project Syndicate.

Johnson writes a fabulous piece entitled Truth From the Top highlighting the work of former Fed governor Thomas Hoenig about just how fragile our banking system truly is and how the politics of promoting the ‘too big to fail’ model have persisted. Let’s navigate.

It is unusual for a senior government official to produce a short, clear analytical paper. It is even rarer when the official’s argument both cuts to the core of the issue and amounts to a devastating critique of the existing order.

In a speech delivered on February 24, Thomas M. Hoenig, Vice Chairman of America’s Federal Deposit Insurance Corporation (FDIC), did exactly that. These four pages are a must-read not only for economic policymakers around the world, but also for anyone who cares about where the global financial system is heading.

Hoenig, former President of the Federal Reserve Bank of Kansas City, has spent his career working on issues related to financial regulation. He communicates effectively to a broad audience – and understanding the technicalities of finance is not needed to grasp his main points.

One of those points is that the world’s largest financial firms have equity that is worth only about 4% of their total assets. As shareholders’ equity is the only real buffer against losses in these corporations, this means that a 4% decline in their assets’ value would completely wipe out their shareholders – taking the companies to the brink of insolvency.

In other words, this is a fragile system. Worse, the current regulatory treatment of derivatives and of funding for large complex financial institutions – the global megabanks – exacerbates this fragility. Perhaps we are moving in the right direction – that is, toward greater stability – but Hoenig is skeptical about the pace of progress.

As he points out, the relevant studies show that the megabanks receive large implicit government subsidies, and this encourages them to stay big – and to take on a lot of risk. In principle, such subsidies are supposed to be phased out through measures being taken as a result of the 2010 Dodd-Frank financial-reform legislation. In practice, these subsidies – and the politics that makes them possible – are firmly entrenched.

The facts may startle you. In 1984, the US had a relatively stable financial system in which small, medium, and – in that day – what were considered large banks had roughly equal shares in US financial assets. (See Hoenig’s chart for precise definitions.) Since the mid-1980’s, big banks’ share in credit allocation has increased dramatically – and what it means to be “big” has changed, so that the largest banks are much bigger relative to the size of the economy (measured, for example, by annual GDP). As Hoenig says, “If even one of the largest five banks were to fail, it would devastate markets and the economy.”

The Dodd-Frank legislation specifies that all banks – of any size – should be able to go bankrupt without causing massive disruption. If the authorities – specifically the Federal Reserve and the FDIC – determine that this is not possible, they have the legal power to force the banks to change how they operate, including by reducing their scale and scope.

But the current reality is that no megabank could go bankrupt without causing another “Lehman moment” – that is, the kind of global panic that resulted in the days after Lehman Brothers failed in September 2008.

In particular, experts like Hoenig who have thought about the cross-border dimensions of bankruptcy emphasize that it simply would not work for a corporation the size of JPMorgan Chase ($3.7 trillion in assets), Bank of America ($3 trillion), or Citigroup ($2.7 trillion).

“Panic is about panic,” Hoenig says, “and people and nations generally protect themselves and their wealth ahead of others. Moreover, there are no international bankruptcy laws to govern such matters and prevent the grabbing of assets.” I would add that the chance of bankruptcy courts cooperating across borders in this context is nil.

As a result, the Federal Reserve and the FDIC should move immediately to force the megabanks to become much simpler legal entities. Current corporate structures are opaque, with the risks hidden around the world – and various shell games allowing companies to claim the same equity in more than one country.

Breaking down the components of banks into manageable pieces makes sense. The Federal Reserve has recently taken a step in that direction by requiring that global banks with a significant presence in the US operate there through a holding company that is well-capitalized by US standards.

This is not about preventing the flow of capital around the world. It is about making the financial system safer. Anyone who disputes the need to do this – and much more – should read and respond to Hoenig.

Will the slowdown in US services sector reverse with warmer weather?

Will the slowdown in US services sector reverse with warmer weather?

Courtesy of SoberLook

In trying to assess the trajectory of the US economy, one is struck by the recent divergence between the manufacturing and the services sectors. Manufacturing in the United States has picked up steam recently in spite of some weather-related headwinds (see chart). The service sector on the other hand took a turn for the worse, which is negatively impacting the labor markets in this service-oriented economy (see story). A couple of key indicators point to slower non-manufacturing activity:

1. The ISM non-manufacturing PMI came in at the lowest level in years.


The detail behind the decline shows the big hit to employment in the service sector, which is what we see in the ADP private payrolls today.

Source: ISM

2. The Markit PMI measure paints a similar picture.

Markit: – Adjusted for seasonal influences, the final Markit U.S. Services PMI™ Business Activity Index dipped sharply to 53.3 in February, from 56.7 in the previous month. Although the index was above the 50.0 no-change mark and signalled a solid pace of expansion, the latest reading was the lowest since October 2013 [US government shutdown]

Most analysts blame this weakness in the service sector and the resulting softness in the labor markets on the weather.

ISI: – There’s hardly a lamer excuse than weather, but that’s probably the case for ADP’s +139k for Feb. It presents downside risk to our best guess for payroll employment of +185k. 

Markit: – With the exception of last October, when the government shutdown hit the economy, the service sector grew at its slowest rate since March of last year. This time, the extreme weather was to blame for the slowdown.

If that is indeed the case, as temperatures cimb, we should see a material rebound in service oriented businesses and therefore some big improvements in the jobs picture later this spring. That would mean more Fed taper and higher yields. 

For those who subscribe to the weakness in the services sector being mostly weather related and therefore transient, now may be a good time to get back into that treasury short trade. 

China’s credit markets under pressure

China's credit markets under pressure

Courtesy of

China's corporate sector has been hit with escalating credit problems. Here is the latest:

1. Shanghai Chaori Energy Science and Technology is about to miss a coupon payment on its bond (see story).

2. As a result, Suining Chuanzhong Economic Technology Development and 2 other companies scrapped their bond offerings – demand for new issue corporate bonds has dried up.

3. Secondary corporate bond trading has also slowed materially. This is fairly new for China since it has never really experienced large scale credit problems in its nascent bond markets.

4. There are indications that banks are cutting back lending as a result. In particular lines have been cut to natural resource wholesalers, traders, and importers (iron ore, steel, cement, etc.). These borrowers in turn are forced to sell inventory that is ofren used as collateral for these loans. Inventory sales depress prices of some of the raw materials, generating further losses for these businesses. This is compounded by the nation's slack industrial demand, with steel mills now running at 50-70% of capacity.

Iron ore April futures contract (source: barchart).

5. With banks cutting back on lending, demand for interbank funding fell materially, sharply lowering China's money market rates. Both 7-day repo and the 1-week SHIBOR are at lows not seen in quite some time. While lower money market rates are good for banks, at this point there is ample liquidity in the system with far less demand.

7-day repo rate (source: chinamoney)
1 week SHIBOR

These developments are quite negative for China's economy. Confidence in the nation's credit markets – both bank lending and corporate bonds – has taken a hit. It remains unclear however just how pervasive these problems could become – some think this is just the tip of the iceberg (see story).


It’s So Cold … Polar Bears Taken Inside; Hundreds of Students Arrested Protesting Keystone Pipeline; Global Warming or Global Cooling?

Courtesy of Mish.

Seriously misguided students are up in arms over the possible revival of the Keystone Pipeline project from Canada to the US. Their concern is greenhouse gas and global warming.

The notion that global warming is caused by man-made greenhouse gasses is questionable enough. The globe has gone through periods of glaciation and melting over hundreds of millions of years. Scientists think they can model changes over a period of hundreds or thousands of years when even 100,000 years may be insufficient.

Anything that happened in the last 100 or 1,000 years can be nothing more than a random fluctuation given the million-year cycles in play.

Trilobite Mass Extinction

I have a fossil of a trilobite on my desk.

They are now extinct, wiped out in a mass extinction about 250 million years ago. Trilobites flourished for 270 million years before that.

Climate change may have been a cause of extinction. Rest assured it was not man-made. Nor could there have been a man-made solution.

It’s So Cold … Polar Bears Taken Inside

To pretend we can track global warming over the last 100 years and attribute that to man-made global warming is ludicrous.

Indeed, scientists are now scrambling to explain why there has been global cooling for the last 17 years.

Global warming is nowhere to be found. The mean global temperature has not risen in 17 years and has been slowly falling for approximately the past 10 years. In 2013, there were more record-low temperatures than record-high temperatures in the United States.

At the end of the first week in January, a brutal spell of cold weather settled over most of the country. Multiple cold-temperature records were shattered across the country. Some sites experienced frigid conditions not seen since the 19th century. Chicago and New York City broke temperature records set in 1894 and 1896, respectively. These extremes were not singular, but exemplary of conditions throughout much of the continent. Temperatures in Chicago were so cold that a polar bear at the Lincoln Park Zoo had to be taken inside.

Global Cooling?

Continue Here

Bacon, Inflation, And “What Gets Measured Gets Managed”

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Core inflation, which excludes the effect of food and energy prices and is how every self-respecting economist measures price increases, is up 8.75% over the past five years. However, as ConvergEx's Nick Colas notes, this is a poor indicator for the true cost of living for many Americans.

Having scrubbed the data, Colas has found the top 10 items that appreciated the most from 2008 to 2013 and the 10 items that became substantially less expensive, according to the government's Consumer Price Index (CPI). The data is deceiving though, as the CPI's "hedonic quality adjustment" distorts the amount of money people actually spend. Even more importantly, Colas warns, things that have a relatively low weighting in the CPI and that people use selectively – such as healthcare and education – don't have a big impact on the core number, but represent considerable expenses for many Americans. Thus we must use caution when using one figure to make policy decisions for an entire nation, and consider what happens to inflationary expectations if and when the still-sluggish economic recovery finally finds second gear.

Via ConvergEx's Nick Colas,
Note from Nick: For something that policymakers essentially think is a non-issue, we regularly get more questions about inflation than any other economic topic.  The most common observation is that “Real world” prices are rising far faster than the benign CPI readings used by the Federal Reserve to make decisions about interest rate policy.  Moreover, Treasury prices – essentially the market’s take on future inflation – may not be telling the whole story due to continued risk aversion among some investors.  Today Beth takes on the topic head on, looking at how the CPI gets calculated and why so many Americans are losing faith in this index as a measure of inflation. 
I can easily go through Costco’s 4-pound “family pack” of bacon in a week; nowadays it goes on and in everything – cupcakes, ice cream, muffins, scallops… and best of all smothered in brown sugar and baked to candied bacon perfection. 
But fellow bacon lovers beware.  In the past five years the price of bacon has jumped more than 32%, according to the Consumer Price Index (CPI).  This places it at number seven on our list of items that have appreciated the most from 2008 to 2013.  Unleaded regular gasoline tops the list with a 95.56% price increase, followed by fuel oil (+49.04%) and cigarettes (+48.27%).  Energy prices are a bit deceptive, however, as five years ago they were still in the massive slump induced by the global financial crisis.  
On the other hand, the price of television dropped more than any other item, falling 65.45% in the past five years, according to the CPI.  Round out the bottom three are personal computers (38.02%) and photographic equipment (-29.72%).  In fact, a majority of the bottom 10 items are technology-related and this is a result of what the CPI calls a “hedonic quality adjustment” (more on this later).  Toys (-24.13%) and dishes (-21.27%) also make an appearance on the list, which is likely a result of the continuing trend of outsourcing to low-cost manufacturing bases such as China.  See the tables following the text for the complete top 10 and bottom 10 lists.
Over the same period of time, headline inflation and core inflation (excluding food and energy prices) increased 10.86% and 8.75%, respectively.  However, there is much more to the story that impacts the true cost of living for many Americans, as the average inflation figures are typically don’t reflect how people actually spend their money.  For example, a middle-aged man who is footing the bill for his family’s healthcare expenses and saving for multiple college tuitions likely sees higher cost of living-driven inflation than indicated by the CPI, as healthcare and education expenses are of relatively little importance in the inflation calculation.  Read on below for our three most important and interesting takeaways from out top/bottom 10 analysis, including more on the variability of what people experience in their actual lives versus what the CPI represents.

First, why is bacon so expensive right now?  More interesting than important in the grand scheme of socioeconomic things, the cost of a pound of retail bacon surged to an all-time high of $5.07 last year; meanwhile, the wholesale price of pork bellies, which are cured into bacon, hit a record higher and exceeded $190 for one hundred pounds in 2013.  So what gives?  A mysterious virus – Porcine Epidemic Diarrhea (PED) – began killing mass numbers of piglets in April when it was first discovered in a U.S. herd.  In just one month, pork futures on the Chicago Mercantile Exchange spiked to more than $100 from $78 in March prior to the outbreak of the virus.  And in CPI data, the price of bacon in the supermarket officially increased 32.55% in the last five years.  On the plus side, reports indicate that the virus is subsiding and 2014 should bring with it lower bacon prices – so go ahead, eat up.

Second, the CPI greatly distorts the true cost of anything technological.  For example, if you bought a TV this year, chances are you did not spend 65.45% less than on the TV you bought five years ago.  Yes, the average price of a 32-inch flat-panel television hit an all-time low average of $435 in 2012, down from $546 in 2011; however, from Q1 2012 to Q2 2012, the average price paid for a new TV increased, climbing to $1,190 to $1,124.  As technology improves, consumers opt for the more expensive, fancier TVs as opposed to the cheaper, archaic ones.  To account for this, the CPI employs a hedonic quality adjustment in which statisticians reduce the amount of a price increase due to quality by a certain figure.  So if the price of a computer rose by 10%, the CPI statisticians might claim that two-thirds of the price increase was attributable to quality improvements and report inflation as only 3.3%.  In the case of televisions, technological advances have occurred so rapidly that the CPI math has grossly underreported inflation for TV and other tech products as well.

And finally, technology aside, the CPI also distorts the true cost of living for many Americans.  For example, inpatient hospital services (#5) and outpatient hospital services (#9) are both on the top 10 list, with respective 5-year price appreciations of 35.82% and 30.71%.  Both are things that people use selectively – if you’re sick then you’re healthcare costs can be exorbitantly higher than for the average person, yet hospital services as a whole only constitute 2.081% of the entire CPI.  Educational books & supplies – #8 on the top 10 list with a 30.85% price increase tell a similar story.  If you’re got three kids in college, you’re expenditures on education and vastly higher than for a single person who done with his or her education.  Educational books & supplies make up 0.195% of the CPI, while the broader education category is just 3.244% of the index.  Most people in college (or parents of college-age children) likely spend more than 3-something percent of their income in education.

The bottom line is that, while core inflation is a useful estimate for price levels in many instances, Federal Reserve Chairwoman Janet Yellen doesn’t care – at a policy level – about 35% healthcare inflation, 31% education inflation or 96% fuel inflation.  A typical American family of four might care immensely about all three, but in the eyes of the Fed inflation a 5-year core inflation rate of 8.75% is relatively minimal.  This highlights a major issue of using one basket of goods for an entire population – things that people use selectively represent a very small fraction of the CPI, yet are a huge fraction of expenditures for a significant portion of the population.
Say you’ve got an aging relative who needs nursing care – an increasingly common challenge for many Americans.  A private room at a nursing home runs about $90,500 per year, so rather than accounting for 0.17% (the CPI weighting for nursing home and adult day care services) of the average household income of $51,016, nursing home services account for 177% of your particular income.  And rather than 10.86% inflation over the past five years – the headline CPI number – your 5-year inflation rate is a whopping 46.0%.  Another example would be a family with two kids enrolled in private colleges, which command an average tuition of $30,094.  College tuition and fees are not 1.81% of you income, as they are in the CPI, but rather 118% of the median household income.  Your resulting 5-year inflation rate is thus 24.3%, or more than twice the headline inflation rate.  Both situations are not at all uncommon and highlight the inefficiencies in applying one uniform inflation gauge to an entire population.
There’s an old saying in business circles; ‘What gets measured gets managed”.  The Consumer Price Index may be an efficient way for policymakers to shorthand an answer to the question of inflationary levels.  It is, however, not an accurate method of assessing how consumers feel the effects of higher prices.  This is an important distinction, for inflationary expectations are the true drivers of how both financial markets and consumers alter their behaviors.  Because of the slow-growth global economy of the past five years, both groups have given the Fed a pass on inflation for the moment.  If and when things improve, the psychology behind inflationary expectations may well be different, and more on a hair trigger, than prior recoveries.
At least we’ll always have bacon to ease the pain.